Regulatory reform won’t fix the financial system; it’s time to think about starting over again from scratch

All the plans that I’ve seen to ”reform” the financial markets flounder on one problem: They all assume that if you give regulators more power, they will regulate.

 The record says that’s simply not true. And if it’s not, giving the Federal Reserve, the Securities & Exchange Commission, and other regulators more power will do absolutely nothing to lessen the chances of a repeat of the financial crisis that almost took down the world economy.

Consider the slapdown administered by federal judge Jed Rakoff to the Securities & Exchange Commission (SEC) on August 10.

The SEC had proposed settling its case against Bank of America (BAC) with the bank paying $33 million. Bank of America wouldn’t, of course, admit that it had done anything wrong in the case.

The case was yet more fallout from Bank of America’s purchase of Merrill Lynch at the end of 2008. In November 2008, Bank of America sent out a proxy statement to investors saying that bonuses would not be paid to senior Merrill Lynch executives without the consent of Bank of America. In fact, however, Bank of America had already agreed to payouts to Merrill Lynch executives of $5.8 billion in bonuses as part of the original merger agreement.

In other words, the proxy was completely misleading. Someone lied to investors.

What riled Judge Rakoff was that the SEC was letting Bank of America get off without naming that someone. Read more